Professional Documents
Culture Documents
pa k H o da D ee pa k H oo da D ep ak H oo da De ep ak
e
p
ee a H oo da D e a H
pa k H o da D ee pa k H oo da D ep ak H oo da De eep ak
oo a D ee pak k H oo da De eep ak Ho ood da De ep ak Ho o
ee pa H oo da D e a H o a De ep ak H o a
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D ee
ee a H oo da D e a H
e e p a k H oo da D
da D ee pa H oo da De ep ak H od a De ep ak Ho od a
D eep ak H oo da De ep ak Ho od a D De epa ak Ho od a D ee
o
oo da D ee pak H oo da De ep ak Ho od a De ep ak Ho od
ep
o
oo da D ee pak H oo da De ep ak Ho od a De ep ak Ho od
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
p
k Ho od a D ee pa k H Hoo oda a D ee pak k H oo da De eep pak H
1
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
11. Market Risk
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D
ee pa k H oo da D e a H oo da
da D ee pa k H oo da De ep ak H ood a De ep ak Ho od a
e
e
e
D
D
D eep pak H oo da De ep ak Ho od a D De epa ak Ho
e ep k Ho od a
where the market value of a portfolio changes by ₹ 1,00,000 for 1 % change in the rate of interest,
d
ep k H od a
the interest rate sensitivity of the portfolio is
ep k H od a
a) ₹ 1,00,0000.
ee pa H oo da D e a H o a De ep ak H o a
ee pa H oo da D e a H o a De ep ak H o a
b) ₹ 1,00,000
o
c) ₹ 1,00,00
d) ₹ 1,00,0
o
o
++++++++++++++++++++++++++++++++++++
k
₹ 1,00,000
p
############################################################################
The dealer at Champak Bank purchased 5000 shares of a public sector undertaking at ₹ 200 per
shares totaling ₹ 10,00,000. If the price change is 1 %, there will be impact of ₹ 10000. The price
e
change can go up to 4 %. that m y result into a loss of ₹ 93040.
D
01In this transaction, the stock price is known as:
e
e
a) market factor
H od a d
b) market factor sensitivity
c) volatility
D ee a H oo da D ep ak H o a
d) defeasance period
ee a H oo da D e a H o a
ee a H oo da D e a H o a
o
p
p
02. What Is the market factor sensitivity:
d
o
d
a) 5000 shares
D
c) ₹ 10 lac
o
d) ₹ 10000
o
k
d
d
03. The price change can go up to 4%. This means the daily is 4%
a) defeasance factor
k
p
k
b) market factor
o
c) volatility
o
D
d) value at risk
p
e
p
a) one day
d
e
b) 2 days
e
D ep ak H o a
a
c) 4 days
D e a
p
d) 7 days
o
a) ₹ 93040
e
b) ₹ 100000
k
c) ₹ 105900
d) ₹ 120000
++++++++++++++++++++++++++++++++++++
p
od
od
H od a
₹ 10000 is the market factor sensitivity as with 1% change, the effect would be ₹ 10000.
k
The possible loss is called value at risk, calculated as 1000000 x 4 x 2.326 = 93040. (2.326 is Z score
od a d
Deepak Hooda
oo a D ee pak k H oo da De eep ak Ho ood da De ep ak Ho od
pa k H o da D ee pa k H oo da D ep ak H oo da De ep ak
e
p
ee a H oo da D e a H
pa k H o da D ee pa k H oo da D ep ak H oo da De eep ak
oo a D ee pak k H oo da De eep ak Ho ood da De ep ak Ho o
ee pa H oo da D e a H o a De ep ak H o a
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D ee
ee a H oo da D e a H
e e p a k H oo da D
da D ee pa H oo da De ep ak H od a De ep ak Ho od a
D eep ak H oo da De ep ak Ho od a D De epa ak Ho od a D ee
o
oo da D ee pak H oo da De ep ak Ho od a De ep ak Ho od
ep
o
oo da D ee pak H oo da De ep ak Ho od a De ep ak Ho od
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
p
k Ho od a D ee pa k H Hoo oda a D ee pak k H oo da De eep pak H
2
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
11. Market Risk
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D
ee pa k H oo da D e a H oo da
da D ee pa k H oo da De ep ak H ood a De ep ak Ho od a
e
e
e
D
D
D eep pak H oo da De ep ak Ho od a D De epa ak Ho
e ep k Ho od a
############################################################################
d
ep k H od a
ep k H od a
The VaR of a Govt. of India bond security is 0.70%. The current yield is 8.10%.
ee pa H oo da D e a H o a De ep ak H o a
ee pa H oo da D e a H o a De ep ak H o a
o
1. In the worst case scenario; the prospective:
a) buyer of the security can expect, the yield to fall to 7.40% by next day
b) buyer of the security can expect, the yield to rise to 8.80% by next day
o
c) seller of the security can expect, the yield to fall to 7.40% by next day
o
k
d) none of the above
p
a) seller of the security can expect, the yield to fall to 7.40% by next day
b) buyer of the security can expect, the yield to rise to 8.80% by next day
c) seller of the security can expect , the yield to rise 8.80% by next day
e
d) None of the above
D
3. In the above case. the Var at 95% confidence level means
e
e
H od a
b) there is 1% possibility for the yield to be higher than 0.70%
d
c) there is 5% possibility of adverse change being higher than 0.70%
D ee a H oo da D ep ak H o a
d) Inadequate information to draw any conclusion
ee a H oo da D e a H o a
ee a H oo da D e a H o a
o
++++++++++++++++++++++++++++++++++++
p
p
d
1. VaR of 0.70% means that the maximum change in the yield can be 0.70%. Hence in a worst case
d
D
scenario, the buyer of the security can expect the yield to fall to 7.40% (8.10 - 0:70%), by next day and
D
the seller can expect the yield to rise to 8.80% (8.10 + 0. 70%)
a De ep ak Ho od a D ee pa k
o
o
k
2. VaR of 0.70% means that the maximum change in the yield can be 0.70%. Hence in a worst case
d
scenario, the buyer of the security can expect the yield to fall to 7.40%. (8.10 - 0.70%) by next day and
d
the seller can expect the yield to rise to (8.10 + 0.70%)
k
p
k
o
3. VaR At 95% confidence level, the possibility for an adverse change in yield being higher than 0.70% is
o
only to the extent of 5% (i.e. loss being higher than 0.70%). At 99% confidence, this possibility is to the
D
p
extent of 1% only
e
p
k
############################################################################
k
d
e
D e a
++++++++++++++++++++++++++++++++++++
od
H od a
H od a
k
D
= 2.33 VAR= 2.33 x 3794.73 = ₹ 8846.73 (for one year i.e. 252 days= 44385)
o
o
od a d
Deepak Hooda
oo a D ee pak k H oo da De eep ak Ho ood da De ep ak Ho od
pa k H o da D ee pa k H oo da D ep ak H oo da De ep ak
e
p
ee a H oo da D e a H
pa k H o da D ee pa k H oo da D ep ak H oo da De eep ak
oo a D ee pak k H oo da De eep ak Ho ood da De ep ak Ho o
ee pa H oo da D e a H o a De ep ak H o a
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D ee
ee a H oo da D e a H
e e p a k H oo da D
da D ee pa H oo da De ep ak H od a De ep ak Ho od a
D eep ak H oo da De ep ak Ho od a D De epa ak Ho od a D ee
o
oo da D ee pak H oo da De ep ak Ho od a De ep ak Ho od
ep
o
oo da D ee pak H oo da De ep ak Ho od a De ep ak Ho od
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
p
k Ho od a D ee pa k H Hoo oda a D ee pak k H oo da De eep pak H
3
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
11. Market Risk
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D
ee pa k H oo da D e a H oo da
da D ee pa k H oo da De ep ak H ood a De ep ak Ho od a
e
e
e
D
D
D eep pak H oo da De ep ak Ho od a D De epa ak Ho
e ep k Ho od a
############################################################################
d
ep k H od a
ep k H od a
Z purchased stock of AB Ltd. He can inform his Boss in following 3 ways:
ee pa H oo da D e a H o a De ep ak H o a
ee pa H oo da D e a H o a De ep ak H o a
o
1. He purchased 1000 shares of stock A at ₹ 800 per share.
2. He has taken ₹ 800000 position in stock A
3. He invested. in stock If price changes by 1 % he would have impact of ₹ 8000. Price is expected
o
o
k
Var will be =
++++++++++++++++++++++++++++++++++++
p
1. Market Factor - Stock price
2. Market factor sensitivity- ₹ 8000 (1 % of total position)
3. Volatility (daily) = 2% Total amount= 8,00,000 x 2% = 16000
e
4. Defeasance period= 1 day (to sell the stock)
D
5. Defeasance factor at 2% volatility= 16000 x 2.05 (@ 96% confidence)
6. Value at risk = 32800 (i.e. potential loss under normal market conditions) (Z value at 96% = 2.05)
e
e
H od a
############################################################################
d
D ee a H oo da D ep ak H o a
Mr. X takes a position in stock 'A' and purchased 1,000 shares of stock 'A' at ₹ 600 per share with
ee a H oo da D e a H o a
Market Factor Sensitivity as 1% and the price is expected to fluctuate 3% daily. Value at Risk (VaR)
ee a H oo da D e a H o a
o
p
a) ₹ 41,868
d
o
d
b) ₹ 45,868
D
c) ₹ 48,868
D
a De ep ak Ho od a D ee pa k
d) ₹ 51,868
o
o
k
++++++++++++++++++++++++++++++++++++
d
d
600000×1%=6000
k
6000×3×2.326=41868
k
o
(@99%confidence level)
o
D
############################################################################
p
e
p
The VAR on a portfolio using a one day time horizon is $ 100 million. What is the VAR using a 10
k
day horizon ?
d
e
a) 316
D ep ak H o a
a
D e a
b) 318
p
c) 416
o
d) 418
D ee
++++++++++++++++++++++++++++++++++++
e
od
H od a
k
k
D
o
############################################################################
o
od a d
Deepak Hooda
oo a D ee pak k H oo da De eep ak Ho ood da De ep ak Ho od
pa k H o da D ee pa k H oo da D ep ak H oo da De ep ak
e
p
ee a H oo da D e a H
pa k H o da D ee pa k H oo da D ep ak H oo da De eep ak
oo a D ee pak k H oo da De eep ak Ho ood da De ep ak Ho o
ee pa H oo da D e a H o a De ep ak H o a
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D ee
ee a H oo da D e a H
e e p a k H oo da D
da D ee pa H oo da De ep ak H od a De ep ak Ho od a
D eep ak H oo da De ep ak Ho od a D De epa ak Ho od a D ee
o
oo da D ee pak H oo da De ep ak Ho od a De ep ak Ho od
ep
o
oo da D ee pak H oo da De ep ak Ho od a De ep ak Ho od
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
p
k Ho od a D ee pa k H Hoo oda a D ee pak k H oo da De eep pak H
4
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
11. Market Risk
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D
ee pa k H oo da D e a H oo da
da D ee pa k H oo da De ep ak H ood a De ep ak Ho od a
e
e
e
D
D
D eep pak H oo da De ep ak Ho od a D De epa ak Ho
e ep k Ho od a
If the daily VAR is $12,500, calculate the weekly, monthly, semiannual and annual VAR. Assume
d
ep k H od a
250 days and 50 weeks per year.
ep k H od a
ee pa H oo da D e a H o a De ep ak H o a
ee pa H oo da D e a H o a De ep ak H o a
++++++++++++++++++++++++++++++++++++
o
Weekly VAR=(12,500) (√5)=27,951
Monthly VAR=( 12,500) (√20)=55,902
o
o
Semiannual VAR= (12,500) (√125)=139,754
k
Annual VAR =(12,500) (√250)=197,642
############################################################################
p
Consider a position consisting of a $100,000 investment in asset A and a $100,000 investment in
asset B. Assume that the daily volatilities of both assets are 1% and that the coefficient of
e
correlation between their returns is 0.3. What is the 5-day 99% VaR for the portfolio?
a) $9,401
b) $7401
D
e
e
c) $8,388
H od a
d) $6,401
d
D ee a H oo da D ep ak H o a
++++++++++++++++++++++++++++++++++++
ee a H oo da D e a H o a
ee a H oo da D e a H o a
o
The standard deviation of the daily change in the investment in each asset is $1,000. The variance of the
p
p
portfolio’s daily change is
d
o
d
D
D
a De ep ak Ho od a D ee pa k
o
o
k
d
p
k
The standard deviation of the portfolio’s daily change is the square root of this or $1,612.45.
o
1,612.45 5 $3,605.55
e
p
This means that 1% of a normal distribution lies more than 2.326 standard deviations below the mean.
d
e
e
D ep ak H o a
D e a
p
############################################################################
p
Consider a portfolio of $5 million in AT&T shares with a daily volatility of 1%. Calculate the 99%
o
a) $ 368,405
e
b) $ 116,500
c) $ 50,000
k
d) $ 70,000
++++++++++++++++++++++++++++++++++++
p
od
H od a
k
D
o
############################################################################
od a d
Deepak Hooda
oo a D ee pak k H oo da De eep ak Ho ood da De ep ak Ho od
pa k H o da D ee pa k H oo da D ep ak H oo da De ep ak
e
p
ee a H oo da D e a H
pa k H o da D ee pa k H oo da D ep ak H oo da De eep ak
oo a D ee pak k H oo da De eep ak Ho ood da De ep ak Ho o
ee pa H oo da D e a H o a De ep ak H o a
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D ee
ee a H oo da D e a H
e e p a k H oo da D
da D ee pa H oo da De ep ak H od a De ep ak Ho od a
D eep ak H oo da De ep ak Ho od a D De epa ak Ho od a D ee
o
oo da D ee pak H oo da De ep ak Ho od a De ep ak Ho od
ep
o
oo da D ee pak H oo da De ep ak Ho od a De ep ak Ho od
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
p
k Ho od a D ee pa k H Hoo oda a D ee pak k H oo da De eep pak H
5
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
11. Market Risk
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D
ee pa k H oo da D e a H oo da
da D ee pa k H oo da De ep ak H ood a De ep ak Ho od a
e
e
e
D
D
D eep pak H oo da De ep ak Ho od a D De epa ak Ho
e ep k Ho od a
Consider a portfolio made up of 5 year 5 % coupon government bonds. The bonds are trading at $
d
ep k H od a
100. The historical annual volatility is 1 %. Expected YTMs are normally distributed with zero mean
ep k H od a
and volatility of 1%. Calculate the 95% one year VAR.
ee pa H oo da D e a H o a De ep ak H o a
ee pa H oo da D e a H o a De ep ak H o a
a) $ 3.83
o
b) $ 4.83
c) $ 5.83
d) $ 6.83
o
o
k
++++++++++++++++++++++++++++++++++++
p
= 5 + 1.65 x 1 = 6.65%
If YTM is 6.65%, bond price will be 93.1708
So the VAR is 100-93.17 = $ 6.83
e
D
############################################################################
Consider the following single bond of $10 million, a modified duration of 3.6 yrs and annualized
e
e
yield of 2%. Calculate the 10 day holding period VaR of the position with a 99% confidence
H od a
interval, assuming there are 252 days in a year.
d
a) $334,186
D ee a H oo da D ep ak H o a
b) $234,186
ee a H oo da D e a H o a
ee a H oo da D e a H o a
c) $434,186
o
p
p
d) $534,186
d
o
d
++++++++++++++++++++++++++++++++++++
D
D
a De ep ak Ho od a D ee pa k
o
k
############################################################################
d
d
Consider the contract on the dollar/euro exchange rate (EC) traded on the CME. The notional
k
amount is 125,000 Euros. Assume that the annual volatility is 12% and the current price is $1.05
k
o
a) $ 1310
D
p
b) $ 2310
e
p
c) $ 3310
k
d) $ 4310
k
d
e
++++++++++++++++++++++++++++++++++++
D ep ak H o a
a
D e a
p
############################################################################
e
A fund has a portfolio consisting of 40% fixed income and 60% equity. The estimated 95% annual
VAR assuming 250 trading days for the entire portfolio was $ 1,367,000 based on the portfolio’s
k
market value of $ 12,500,000. The correlation between bond and stock returns is 0.The annual loss
on the equity part of the portfolio is expected to exceed $ 1,153,000 5% of the time.
What will be the daily expected loss that will be exceeded 5 % of the time for the bond portfolio?
p
a) 46,445
od
od
b) 36,445
H od a
H od a
c) 26,445
k
d) 16,445
D
o
o
od a d
Deepak Hooda
oo a D ee pak k H oo da De eep ak Ho ood da De ep ak Ho od
pa k H o da D ee pa k H oo da D ep ak H oo da De ep ak
e
p
ee a H oo da D e a H
pa k H o da D ee pa k H oo da D ep ak H oo da De eep ak
oo a D ee pak k H oo da De eep ak Ho ood da De ep ak Ho o
ee pa H oo da D e a H o a De ep ak H o a
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D ee
ee a H oo da D e a H
e e p a k H oo da D
da D ee pa H oo da De ep ak H od a De ep ak Ho od a
D eep ak H oo da De ep ak Ho od a D De epa ak Ho od a D ee
o
oo da D ee pak H oo da De ep ak Ho od a De ep ak Ho od
ep
o
oo da D ee pak H oo da De ep ak Ho od a De ep ak Ho od
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
p
k Ho od a D ee pa k H Hoo oda a D ee pak k H oo da De eep pak H
6
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
11. Market Risk
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D
ee pa k H oo da D e a H oo da
da D ee pa k H oo da De ep ak H ood a De ep ak Ho od a
e
e
e
D
D
D eep pak H oo da De ep ak Ho od a D De epa ak Ho
e ep k Ho od a
++++++++++++++++++++++++++++++++++++
d
ep k H od a
ep k H od a
1,367,000^2 = 1,153,000^2 + x^2
ee pa H oo da D e a H o a De ep ak H o a
X = $ 734,357
ee pa H oo da D e a H o a De ep ak H o a
o
Daily VAR = 734357/√250
= 46,445
o
############################################################################
o
k
Follow Bank has a $1 million position in a five-year, zero-coupon bond with a face value of
$1,402,552. The bond is trading at a yield to maturity of 7.00 percent. The historical mean change
in daily yields is 0.0 percent, and the standard deviation is 12 basis points.
p
++++++++++++++++++++++++++++++++++++
e
a. What is the modified duration of the bond?
MD = D/(1 + R) = 5/(1.07) = 4.6729 years
D
b. What is the maximum adverse daily yield move given that we desire no more than a 5 percent chance
e
e
H od a
Potential adverse move in yield at 5 percent = 1.65σ = 1.65 x 0.0012 = .001980
d
c. What is the price volatility of this bond?
D ee a H oo da D ep ak H o a
Price volatility = MD x potential adverse move in yield = 4.6729 x .00198 = 0.009252 or 0.9252 percent
ee a H oo da D e a H o a
p
d
o
d
############################################################################
D
D
An 8-year 8% semi-annual bond has a BPV of ₹ 125. The yield on the bond has increased by 5 basis
a De ep ak Ho od a D ee pa k
o
1 day VaR of a portfolio is ₹ 500,000 with 95% confidence level. In a period of six months (125 working
D
p
days) how many times the loss on the portfolio may exceed ₹ 500,000?
e
p
(a) 4 days
k
(b) 5 days
k
d
(c) 6 days
e
e
D ep ak H o a
(d) 7 days
a
D e a
p
A bond with remaining maturity of 5 years is presently yielding 6%. Its modified duration is 5%. What is its
o
McCauley's duration?
D e
(b) 3. 77 years
(c) 5.30 years
k
############################################################################
od
od
H od a
Bank holds 3 years bonds with face value of ₹ 1000 and coupon rate of 6% payable half-yearly.
H od a
k
Deepak Hooda
D eep pak H oo da De ep ak Ho od a D De epa ak Ho
D eep ak H oo da De ep ak Ho od a D e epa k Ho od
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D ee
d)
c)
b)
e a)
ee a H oo da D e a H o a e ep k H od a
k e p k o d o D ep
ee pa H oo da D e a H o a De ep ak H o a e
d) 871.13
c) 886.82
b) 892.13
a) 898.49
₹ 1000
a) 3 years
a) 3 years
d) ₹ 11.77
c) ₹ 11.21
b) ₹ 10.50
a) ₹ 10.00
₹ 857.91
₹ 898.49
₹ 942.34
d) 1.0000%
c) 1.1205%
b) 1.2293%
a) 1.3095%
pa k H o da D ee pa k H oo da D ep ak H oo da De ep ak
c) 2.7761 years
b) 2.9054 years
d) 2.6190 years
b) 2.9054 years
d) 2.6190 years
c) 2.7761 years
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
k o od
D ee p a k o d D ee a H oo da D e a H
k
k Ho od a D ee pa k H Hoo oda a D ee pak k H oo da De eep pak H
H od a p o
oo a D ee pak k H oo da De eep ak Ho ood da De ep ak Ho o
oo da D ee pak H oo da De ep ak Ho od a De ep ak Ho od
2. What is the duration in the above case:
d D
++++++++++++++++++++++++++++++++++++
ee pa H oo da D e a H o a De ep ak H o a
od a e p k o d D ee pa k H oo da D e a H oo da
D ep ak H o a e p k H od a
o e p k o d D
D eep ak H oo da De ep ak Ho od a D De epa ak Ho od a D ee
e p
Deepak Hooda
ee a H oo da D e a H o a e ep k H od a
k e p k o d o D e
11. Market Risk
ee pa H oo da D e a H o a De ep ak H o a p
pa k H o da D ee pa k H oo da D ep ak H oo da De eep ak
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
k e p k o d
6. What will be the new value of bond after increase in yield from 10% to 10.5%
o od
D e a D ee a H oo da D e a H
k
k Ho od a D ee pa k H Hoo oda a D ee pak k H oo da De eep pak H
H od a p o
oo a D ee pak k H oo da De eep ak Ho ood da De ep ak Ho od
4. In the above case, if the yield changes from 10% to 10.5% what will be percentage in value:
6%.
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D ee
ee a H oo da D e a H o a
k e p k o d e ep k H od a
o D e ep
ee pa H oo da D e a H o a De ep ak H o a e
d) 2 years
a) 3 years
d) 2 years
a) 3 years
a) ₹ 26.27
c) 2.7 years
c) 2.7 years
pa k H o da D ee pa k H oo da D ep ak H oo da De ep ak
b) 2.86 years
b) 2.86 years
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
e p k d
Deepak Hooda
ee a H oo da D e a H o a e ep k H od a
k e p k o d o D e
11. Market Risk
ee pa H oo da D e a H o a De ep ak H o a p
k e p k d
Price of the bond and Macaulay's duration can be answered referring above method
o od
D e a o D ee a H oo da D e a H
k
3. If there is further change of expected yield to 7%, what will be change ln price?
k Ho od a D ee pa k H Hoo oda a D ee pak k H oo da De eep pak H
H od a p o
############################################################################
oo a D ee pak k H oo da De eep ak Ho ood da De ep ak Ho od
Bank-Z purchased 5%, 3 year bond with face value ₹ 1000 at ₹ 973.27 when expected yield was
a) ₹ 40
ee pa H oo da D e a H o a De ep ak H o a e
a) ₹ 960
d) ₹ 34.08
c) ₹ 30.12
b) ₹ 28.29
b) 50 paise
d) ₹ 934.56
c) ₹ 947.00
b) ₹ 961.13
a) ₹ 973.27
c) 80 paise
pa k H o da D ee pa k H oo da D ep ak H oo da De ep ak
d) inadequate information
= 2.7 x 0.01 x 973.27 = ₹ 26.27
k Ho od a D ee pa k H Hoo oda a D ee pak k H oo da De eep pak H
p o
ee pa H oo da D e a H o a De ep ak H o a
od a e p k o d D ee pa k H oo da D e a H oo da
d
Deepak Hooda
ee a H oo da D e a H o a e ep k H od a
k e p k o d o D e
11. Market Risk
ee pa H oo da D e a H o a De ep ak H o a p
pa k H o da D ee pa k H oo da D ep ak H oo da De eep ak
4. If there is further change of expected yield to 7%, what will be new price?
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
k o od e
D e a p k o d D ee a H oo da D e a H
k
yield, Due to change in yield to 9%, the value of the securities declined to ₹ 1020.
Price of the bond and Macaulay's duration can be answered referring the below Example
############################################################################
oo a D ee pak k H oo da De eep ak Ho ood da De ep ak Ho od
01. On the basis of above information, calculate change in basis point value for each basis point
02 If there is increase in yield by 100 basis points, instead of 50 basis points as above, during this
da D ee pa H oo da De ep ak H od a De ep ak Ho od a
da D ee pa k H oo da De ep ak H ood a De ep ak Ho od a
9
e
p
ee a H oo da D e a H
pa k H o da D ee pa k H oo da D ep ak H oo da De eep ak
oo a D ee pak k H oo da De eep ak Ho ood da De ep ak Ho o
ee pa H oo da D e a H o a De ep ak H o a
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D ee
ee a H oo da D e a H
e e p a k H oo da D
da D ee pa H oo da De ep ak H od a De ep ak Ho od a
D eep ak H oo da De ep ak Ho od a D De epa ak Ho od a D ee
o
oo da D ee pak H oo da De ep ak Ho od a De ep ak Ho od
ep
o
oo da D ee pak H oo da De ep ak Ho od a De ep ak Ho od
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
p
k Ho od a D ee pa k H Hoo oda a D ee pak k H oo da De eep pak H
10
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
11. Market Risk
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D
ee pa k H oo da D e a H oo da
da D ee pa k H oo da De ep ak H ood a De ep ak Ho od a
e
e
e
D
D
D eep pak H oo da De ep ak Ho od a D De epa ak Ho
e ep k Ho od a
b) ₹ 980
d
ep k H od a
c) ₹ 1040
ep k H od a
d) ₹ 1080
ee pa H oo da D e a H o a De ep ak H o a
ee pa H oo da D e a H o a De ep ak H o a
o
03. The bank decides to sell the security immediately, to stop the loss. How much it will lose on
the sale transaction ?
a) ₹ 20 per bond
o
o
b) ₹ 30 per bond
k
c) ₹ 40 per bond
d) inadequate Information.
p
++++++++++++++++++++++++++++++++++++
1. Change in value I change in yield = (1060-1020)/(9.00 - 8.50) = ₹ 40/50 basis points= 80 paise
e
2 Change in basis point
D
= Change in value/change in yield = (1060-1020)/(9.00 - 8.50)
= ₹ 40/50 basis points = 80 paise.
e
e
H od a
Change for 100 basis points = 80 p x 100 = ₹ 80. Value = Old price - change = 1060- 80 = 960
d
D ee a H oo da D ep ak H o a
3 Loss = purchase price - current value at which it can be sold = 1060 - 1020 = ₹ 40
ee a H oo da D e a H o a
ee a H oo da D e a H o a
o
############################################################################
p
p
d
1. X purchased 20000 shares at ₹ 50 per share (total amount ₹ 10 lac) with his own capital plus
o
d
D
borrowing from market (his borrowing limit being 9 times of his capital. Hence ratio = 1- 9). In a
D
few days, there is 2% decline in the value of shares, which reduced the value of his portfolio to ₹
a De ep ak Ho od a D ee pa k
980000 and also the amount of his capital by ₹ 20000 (leaving capital of ₹ 80000).
o
o
k
d
2. In the light of reduction in capital to ₹ 80000, he is required to liquidate the holding by ₹ 2 lac
d
(10 times of reduced capital) to pay the excessive borrowing (due to reduced capital). But the
k
market expects further fall in the value of this stock due to which the investment has become
k
o
illiquid. In such circumstances, he can liquidate the holding at a loss only, which will further
o
deplete his capital, which would force him for further liquidation of his holding for keeping the
D
p
3. In case the liquidity position of the market suffers, it will further drive the share price down,
k
e
D ep ak H o a
a
D e a
p
1. The risk of adverse movement in the price of shares has reduced the capital. This is called:
p
a) price risk
o
d) liquidation risk
k
2. For a specific security, as in the above case, when the liquidity in the market is reduced, it is
called:
p
a) price risk
od
od
H od a
d) liquidation risk
D
o
o
od a d
Deepak Hooda
oo a D ee pak k H oo da De eep ak Ho ood da De ep ak Ho od
pa k H o da D ee pa k H oo da D ep ak H oo da De ep ak
e
p
ee a H oo da D e a H
pa k H o da D ee pa k H oo da D ep ak H oo da De eep ak
oo a D ee pak k H oo da De eep ak Ho ood da De ep ak Ho o
ee pa H oo da D e a H o a De ep ak H o a
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D ee
ee a H oo da D e a H
e e p a k H oo da D
da D ee pa H oo da De ep ak H od a De ep ak Ho od a
D eep ak H oo da De ep ak Ho od a D De epa ak Ho od a D ee
o
oo da D ee pak H oo da De ep ak Ho od a De ep ak Ho od
ep
o
oo da D ee pak H oo da De ep ak Ho od a De ep ak Ho od
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
p
k Ho od a D ee pa k H Hoo oda a D ee pak k H oo da De eep pak H
11
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
11. Market Risk
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D
ee pa k H oo da D e a H oo da
da D ee pa k H oo da De ep ak H ood a De ep ak Ho od a
e
e
e
D
D
D eep pak H oo da De ep ak Ho od a D De epa ak Ho
e ep k Ho od a
3. In case the liquidity position of the market suffers, it will further drive the share price down,
d
ep k H od a
which would result in losses. This is called:
ep k H od a
a) price risk
ee pa H oo da D e a H o a De ep ak H o a
ee pa H oo da D e a H o a De ep ak H o a
b) asset liquidity risk
o
c) market liquidity risk
d) liquidation risk
o
o
++++++++++++++++++++++++++++++++++++
k
1. The risk of adverse movement in the price is called price risk
p
2. The risk of reduced liquidity in the market for a specific security is called asset liquidity risk.
3. In case the liquidity position of the market suffers, it will further drive the share price down, which would
e
result in losses. This is called market liquidity risk.
D
############################################################################
e
e
Champak Bank made an investment in govt. bonds worth ₹ 5 Cr. The maturity period of the bonds
H od a
is 5 years, the face value is ₹ 100 and the coupon rate is 8%. The bond has a market yield of 10%
d
and the price is ₹ 92.00. Due to change in interest rates, the market yield changes to 9.90% and the
D ee a H oo da D ep ak H o a
market value to ₹ 92.50.
ee a H oo da D e a H o a
ee a H oo da D e a H o a
o
p
p
1. Based on the above information, please calculate the basis point value of the bond:
d
a) 0.02
d
D
b) 0.05
c) 0.10
D
a De ep ak Ho od a D ee pa k
o
d) 0.20
o
k
d
2. What will be the change in value of investment, for the total investment of ₹ 5 Cr for per basis
d
point change in the yield?
k
a) ₹ 25000
p
k
b) ₹ 20000
o
c) ₹ 15000
D
d) ₹ 10000
p
e
p
k
3. If there is 0.10% change in the yield, what will be change in the value of the bond on an
k
investment of ₹ 5 Cr:
d
e
e
D ep ak H o a
a) 100000
a
D e a
p
b) 200000
p
c) 250000
o
d) 500000
D ee
++++++++++++++++++++++++++++++++++++
k
o
od a d
Deepak Hooda
oo a D ee pak k H oo da De eep ak Ho ood da De ep ak Ho od
pa k H o da D ee pa k H oo da D ep ak H oo da De ep ak
e
p
ee a H oo da D e a H
pa k H o da D ee pa k H oo da D ep ak H oo da De eep ak
oo a D ee pak k H oo da De eep ak Ho ood da De ep ak Ho o
ee pa H oo da D e a H o a De ep ak H o a
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D ee
ee a H oo da D e a H
e e p a k H oo da D
da D ee pa H oo da De ep ak H od a De ep ak Ho od a
D eep ak H oo da De ep ak Ho od a D De epa ak Ho od a D ee
o
oo da D ee pak H oo da De ep ak Ho od a De ep ak Ho od
ep
o
oo da D ee pak H oo da De ep ak Ho od a De ep ak Ho od
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
p
k Ho od a D ee pa k H Hoo oda a D ee pak k H oo da De eep pak H
12
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
11. Market Risk
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D
ee pa k H oo da D e a H oo da
da D ee pa k H oo da De ep ak H ood a De ep ak Ho od a
e
e
e
D
D
D eep pak H oo da De ep ak Ho od a D De epa ak Ho
e ep k Ho od a
3. Change in price of bond = 0.50.
d
ep k H od a
Change in yield 10 basis points.
ep k H od a
Per basis point change = 0.50/.10 = ₹ 0.05 OR. Per ₹ 1 Cr = ₹ 5000
ee pa H oo da D e a H o a De ep ak H o a
ee pa H oo da D e a H o a De ep ak H o a
For total investment the change = 50000000 x 0.05 = 25000
o
If per basis point change, the value change is ₹ 25000, for 10 points it will be 25000 x 10 = 250000
o
o
############################################################################
k
Champak Bank has a credit exposure of ₹ 80 Cr which is secured by financial collateral security of
A+ rated bonds of ₹ 40 Cr issued by a Public Sector Undertaking of Govt. of India. The period of
p
this exposure is 4 years and the residual maturity of the financial collateral is 3 year The financial
collateral is an eligible credit risk mitigant. There is no currency mismatch. (As per RBI guidelines
the haircut applicable to this collateral is 6% and the haircut on account of currency mismatch is 0
if no currency mismatch is there and 0.08, if there is currency mismatch).
e
D
1. Based on the above information, calculate the haircut adjusted collateral value:
a) ₹ 40.00 Cr
e
e
H od a
b) ₹ 37.60 Cr
d
c) ₹ 27.57 Cr
D ee a H oo da D ep ak H o a
d) ₹ 12.43 Cr
ee a H oo da D e a H o a
ee a H oo da D e a H o a
o
2. On the basis of above information, what is value of haircut adjusted collateral after adjustment
p
p
on account of maturity mismatch:
d
o
d
a) ₹ 40.00 Cr
D
b) ₹ 37.60 Cr
D
a De ep ak Ho od a D ee pa k
c) ₹ 27.57 Cr
o
d) ₹ 12.43 Cr
k
d
d
3. On the basis of above information, calculate the value of exposure at Risk.
a) ₹ 40.00 Cr
k
p
k
b) ₹ 37.60 Cr
o
c) ₹ 27.57 Cr
D
d) ₹ 12.43 Cr
p
e
p
++++++++++++++++++++++++++++++++++++
k
1. In this case the residual maturity of collateral is less than the residual maturity of the loan, hence there
d
e
e
D ep ak H o a
is maturity mismatch. There is ·· no currency mismatch as stated in the problem. To find out the net
a
D e a
p
exposure qualifying for capital adequacy purpose, at the first stage, the hair cut of the collateral will be
p
calculated and then value of hair-cut adjusted collateral will be calculated, taking into account the
o
guidelines it is 6%) and Hfx is the haircut for currency mismatch (0% if exposure and collateral are in the
same currency and 0.08% if the exposure and collateral are in the different currency).
p
State 2 - Value of haircut adjusted collateral after adjustment on account of maturity mismatch:
od
od
H od a
= 37.60 x (3-0.25)/(4-0.25)
k
o
od a d
Deepak Hooda
oo a D ee pak k H oo da De eep ak Ho ood da De ep ak Ho od
pa k H o da D ee pa k H oo da D ep ak H oo da De ep ak
e
p
ee a H oo da D e a H
pa k H o da D ee pa k H oo da D ep ak H oo da De eep ak
oo a D ee pak k H oo da De eep ak Ho ood da De ep ak Ho o
ee pa H oo da D e a H o a De ep ak H o a
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D ee
ee a H oo da D e a H
e e p a k H oo da D
da D ee pa H oo da De ep ak H od a De ep ak Ho od a
D eep ak H oo da De ep ak Ho od a D De epa ak Ho od a D ee
o
oo da D ee pak H oo da De ep ak Ho od a De ep ak Ho od
ep
o
oo da D ee pak H oo da De ep ak Ho od a De ep ak Ho od
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
p
k Ho od a D ee pa k H Hoo oda a D ee pak k H oo da De eep pak H
13
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
11. Market Risk
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D
ee pa k H oo da D e a H oo da
da D ee pa k H oo da De ep ak H ood a De ep ak Ho od a
e
e
e
D
D
D eep pak H oo da De ep ak Ho od a D De epa ak Ho
e ep k Ho od a
(P= value of credit risk mitigant adjusted for maturity mismatch, t is minimum of T and residual maturity of
d
ep k H od a
credit protection expressed in years and T is minimum of 5 years and residual maturity of exposure
ep k H od a
expressed in years
ee pa H oo da D e a H o a De ep ak H o a
ee pa H oo da D e a H o a De ep ak H o a
o
2. As above
3. As above
o
o
k
############################################################################
p
Borrower X Borrower Y
Exposure. 200 200
e
Maturity of exposure 6 2
Nature of exposure
Currency ₹ D
Corporate Corporate
₹
e
e
H od a
Haircut for exposure 12% 15%
d
Value of collateral after hair cut 132 136
D ee a H oo da D ep ak H o a
ee a H oo da D e a H o a
ee a H oo da D e a H o a
E* = max {0, [E x (1 + He f C x (1 - He - Hfx]}
o
p
p
d
E = current value of the exposure for which the collateral qualifies as a risk mitigant
o
d
He = haircut appropriate to the exposure
D
D
C = the current value of the collateral received
a De ep ak Ho od a D ee pa k
o
k
Hfx = haircut appropriate for currency mismatch between the collateral and exposure
d
d
Exposure for X = max {0, [ 200* (1.12) - 132}
k
= ₹ 92 Crore
o
Note: in this questions value of collateral after appropriate haircut has been given thus we need not
D
e
p
k
= ₹ 94 Crore
D ep ak H o a
a
D e a
p
Question 4: Businessman bank granted a corporate loan of ₹ 20 Crore to XYZ limited repayable over 5
o
year for an haircut of 6%. The credit rating of company is A. The value of collateral in the account is r10
D e
Crore in the form of unrated bonds issued by another bank with a residual maturity of 4 year Haircut for
e
exposure is zero
k
10 x (1-0.06)
od
od
= 9.4 Crore
H od a
H od a
k
Deepak Hooda
D eep pak H oo da De ep ak Ho od a D De epa ak Ho
D eep ak H oo da De ep ak Ho od a D e epa k Ho od
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D ee
ee a H oo da D e a H o a
k e p k o d e ep k H od a
o D e
= 5.3 Crore
by 100 bps
by 100 bps
e ep
= 10.6 Crore
ee pa H oo da D e a H o a De ep ak H o a
c) 96.92
b) 99.48
c) 97.64
b) 99.48
d) 105.74
a) 109.68
d) 102.08
a) 101.48
d) 104.01
c) 103.00
b) 101.64
a) 101.48
d) 104.01
c) 103.00
b) 101.64
a) 101.48
d) 104.01
c) 103.00
b) 101.64
a) 101.48
d) 104.01
c) 103.00
b) 101.64
a) 101.48
= max [ 0, (10.6]
pa k H o da D ee pa k H oo da D ep ak H oo da De ep ak
= max [ 0, (20-9.4]
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
k o od
D ee p a k o d D ee a H oo da D e a H
k
k Ho od a D ee pa k H Hoo oda a D ee pak k H oo da De eep pak H
H od a p o
oo a D ee pak k H oo da De eep ak Ho ood da De ep ak Ho o
oo da D ee pak H oo da De ep ak Ho od a De ep ak Ho od
d D ee pa H oo da D e a H o a De ep ak H o a
od a e p k o d D ee pa k H oo da D e a H oo da
investment in following two securities as under.
a De ep ak Ho od a D ee pa k o d D e e p a k H oo da D
e
D ep ak H o a e p k H od a
o e p k o d D
c. What is the value of risk weighted asset for this exposure
D eep ak H oo da De ep ak Ho od a D De epa ak Ho od a D ee
e p
Deepak Hooda
ee a H oo da D e a H o a e ep k H od a
k e p k o d o D e
8% Treasury Bond (TB-2) of Face Value ₹ 100 for 8 years: ₹ 60000
6% Treasury Bond (TB-1) of Face Value ₹ 100 for 5 years: ₹ 40000
11. Market Risk
ee pa H oo da D e a H o a De ep ak H o a p
pa k H o da D ee pa k H oo da D ep ak H oo da De eep ak
4. What would be the price of TB-2 as on 31st Dec.2015 if the yield is 7.65%
2. What would be the price of TB-2 as on 31st Dec.2014 if the yield is 7.25%
1. What would be the price of TB-1 as on 31st Dec.2014 if the yield is 5.15%
3. What would be the price of TB-1 as on 31st Dec.2015 if the yield is 5.45%.
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
k o od e
D e a p k o d D ee a H oo da D e a H
k
k Ho od a D ee pa k H Hoo oda a D ee pak k H oo da De eep pak H
H od a p o
############################################################################
5. What would be the price of TB-1 as on 31st Dec.20l4 if the yield as on 31st Dec.2014 increases
Lakshay Bank Ltd. needs to invest ₹ 100000 as on 31st December 2013 and decides to spread its
6. What would be the price of TB-2 as on 31st Dec.2014 if the yield as on 31st Dec.2014 decreases
da D ee pa H oo da De ep ak H od a De ep ak Ho od a
da D ee pa k H oo da De ep ak H ood a De ep ak Ho od a
14
e
p
ee a H oo da D e a H
pa k H o da D ee pa k H oo da D ep ak H oo da De eep ak
oo a D ee pak k H oo da De eep ak Ho ood da De ep ak Ho o
ee pa H oo da D e a H o a De ep ak H o a
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D ee
ee a H oo da D e a H
e e p a k H oo da D
da D ee pa H oo da De ep ak H od a De ep ak Ho od a
D eep ak H oo da De ep ak Ho od a D De epa ak Ho od a D ee
o
oo da D ee pak H oo da De ep ak Ho od a De ep ak Ho od
ep
o
oo da D ee pak H oo da De ep ak Ho od a De ep ak Ho od
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
p
k Ho od a D ee pa k H Hoo oda a D ee pak k H oo da De eep pak H
15
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
11. Market Risk
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D
ee pa k H oo da D e a H oo da
da D ee pa k H oo da De ep ak H ood a De ep ak Ho od a
e
e
e
D
D
D eep pak H oo da De ep ak Ho od a D De epa ak Ho
e ep k Ho od a
d
ep k H od a
7. If the Bank sells TB-l on 31st Dec.2014 at the prevailing yield, how much would be the Profit or
ep k H od a
Loss to the bank
ee pa H oo da D e a H o a De ep ak H o a
ee pa H oo da D e a H o a De ep ak H o a
a) 1200
o
b) (1200)
c) 208
d) (208)
o
o
k
8. If the decides Bank sells TB-2 on 3lst Dec.2014 at the prevailing yield, how much would be the
profit or loss to the bank.
a) 1604
p
b) (1604)
c) 2406
d) (2406)
e
D
9. If the Bank decides to sell both the Securities on 31st Dec.2015 at the respective prevailing
yields of 5.45% & 7.65%, how much would be the Profit or Loss to the bank
e
e
a) 1544
H od a
b) (1544)
d
c) 1576
D ee a H oo da D ep ak H o a
d) (1576)
ee a H oo da D e a H o a
ee a H oo da D e a H o a
o
p
p
d
++++++++++++++++++++++++++++++++++++
o
d
D
D
1 Market Price is the price at which the Bond can be sold or purchased in the market. It is calculated by
a De ep ak Ho od a D ee pa k
reducing the 'future value' of all the amounts to be received in future to 'present value' and then adding up
o
d
Market Price= Coupon Amount I (1 +r%) + Coupon Amount I (l +r%)^2 + Coupon Amount / (1 +r%)^3……
+ (Coupon Amount+ Principal Amount) / (1 +r%)^n
k
p
k
o
e
p
k
d
e
Market Price
D ep ak H o a
a
D e a
3. In the instant case, Principal Amount= ₹ 100 Future flows= 6% of 100 i.e., = ₹ 6
od
H od a
H od a
Deepak Hooda
oo a D ee pak k H oo da De eep ak Ho ood da De ep ak Ho od
pa k H o da D ee pa k H oo da D ep ak H oo da De ep ak
e
p
ee a H oo da D e a H
pa k H o da D ee pa k H oo da D ep ak H oo da De eep ak
oo a D ee pak k H oo da De eep ak Ho ood da De ep ak Ho o
ee pa H oo da D e a H o a De ep ak H o a
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D ee
ee a H oo da D e a H
e e p a k H oo da D
da D ee pa H oo da De ep ak H od a De ep ak Ho od a
D eep ak H oo da De ep ak Ho od a D De epa ak Ho od a D ee
o
oo da D ee pak H oo da De ep ak Ho od a De ep ak Ho od
ep
o
oo da D ee pak H oo da De ep ak Ho od a De ep ak Ho od
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
p
k Ho od a D ee pa k H Hoo oda a D ee pak k H oo da De eep pak H
16
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
11. Market Risk
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D
ee pa k H oo da D e a H oo da
da D ee pa k H oo da De ep ak H ood a De ep ak Ho od a
e
e
e
D
D
D eep pak H oo da De ep ak Ho od a D De epa ak Ho
e ep k Ho od a
d
ep k H od a
4. In the instant case, Principal Amount = ₹ 100
ep k H od a
Future flows = 8% of 100 i.e. =₹ 8
ee pa H oo da D e a H o a De ep ak H o a
ee pa H oo da D e a H o a De ep ak H o a
r = 7.65% i.e., market rate of Interest and
o
n = 6 years, remaining numbers of years.
Market Price =8/(1 +7.65%) + 8/(1 +7.65%)^2 + 8/(1+7.65%)^3 + 8/(1+7.65%)^4 + 8/(1 +7.65%)^5 +
108/(1 +7.65%)^6
o
o
=7.43 + 6.90 + 6.40 + 5.96 + 5.54 +.69.40 = 101.64
k
5. In the instant case, Principal Amount = ₹ 100
Future Inflows = 6% of 100 i.e., = ₹ 6
p
R=6.5% i.e., market rate of interest (because the yield increases by 100 bps over 31st Dec.2007 i.e., by 1
% and now becomes 6.15%, and N=4 years, remaining number of years.
e
Market Price=6/ (1+6.15%) +6/ (1+6.15%)^2 +6/ (1+6.15%)^3+ 106/ (1+6.15%)^3
D
= 6/ (1.0615) + 6/ (1.0615) ^2 + 6/ (1.0615) ^3 + 106/ (l.0615) ^3
= 5.65 + 5.32 + 5.02 + 83.49 = 99.48
e
e
H od a
6 In the instant case, Principal Amount = ₹ 100
d
Future flows= 8% of 100 i.e., = ₹ 8
D ee a H oo da D ep ak H o a
r = 6.25% i.e., market rate of interest (because the yield decreases by 100 bps over 31st Dec.2007 i.e.,
ee a H oo da D e a H o a
ee a H oo da D e a H o a
by 1 % and now becomes 6.25%, and n = 7 years, remaining number of years.
o
p
p
d
o
k
No. of securities= 400, Rate= 103, therefore amount= 400 x 103 = 41200
d
Initial investment is ₹ 40000 therefore profit= 41200-40000 = 1200
k
p
k
o
No. of securities= 600, Rate= 104.01, Hence amount= 600 x 104.01 = 62406
D
e
p
k
D e a
p
############################################################################
Lakshay Bank Ltd. makes certain investment in the Treasury Bonds of Face Value ₹ 100 as on
p
od
H od a
k
D
o
o
od a d
Deepak Hooda
oo a D ee pak k H oo da De eep ak Ho ood da De ep ak Ho od
pa k H o da D ee pa k H oo da D ep ak H oo da De ep ak
e
p
ee a H oo da D e a H
pa k H o da D ee pa k H oo da D ep ak H oo da De eep ak
oo a D ee pak k H oo da De eep ak Ho ood da De ep ak Ho o
ee pa H oo da D e a H o a De ep ak H o a
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D ee
ee a H oo da D e a H
e e p a k H oo da D
da D ee pa H oo da De ep ak H od a De ep ak Ho od a
D eep ak H oo da De ep ak Ho od a D De epa ak Ho od a D ee
o
oo da D ee pak H oo da De ep ak Ho od a De ep ak Ho od
ep
o
oo da D ee pak H oo da De ep ak Ho od a De ep ak Ho od
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
p
k Ho od a D ee pa k H Hoo oda a D ee pak k H oo da De eep pak H
17
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
11. Market Risk
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D
ee pa k H oo da D e a H oo da
da D ee pa k H oo da De ep ak H ood a De ep ak Ho od a
e
e
e
D
D
D eep pak H oo da De ep ak Ho od a D De epa ak Ho
e ep k Ho od a
1. How much will be the change BPV for every 1 bps increase in the yield on TB-l on 31st Dec.15
d
ep k H od a
over the yield of 5.15% as on 31st Dec.14
ep k H od a
a) 0.0276
ee pa H oo da D e a H o a De ep ak H o a
ee pa H oo da D e a H o a De ep ak H o a
b) (0.0276)
o
c) 0.0482
d) (0.0482)
o
o
2. How much will be the change in BPV for every 1 bps increase in the yield on TB-2 on 31st
k
Dec.15 over the yield of 7;25% as on 31st Dec.14.
a) 0.0276
b) (0.0276)
p
c) 0.0482
d) (0.0482)
e
3. How much will be the change in BPV for every 1 bps decrease in the yield on TB-1 on 31st Dec
15 over the yield of 5.15% as on 31st Dec.14
a) 0.0216
D
e
e
b) (0.0216)
H od a
c) 0.0482
d
d) (0.0482)
D ee a H oo da D ep ak H o a
ee a H oo da D e a H o a
ee a H oo da D e a H o a
4. How much will be the change in BPV for every 1 bps decrease in the yield on TB-2 on 31st
o
p
p
Dec.15 over the yield of 7.25% as on 31st Dec.14
d
a) 0.0274
o
d
D
b) (0.0274)
c) 0.0485
D
a De ep ak Ho od a D ee pa k
o
d) (0.0485)
o
k
d
++++++++++++++++++++++++++++++++++++
d
1 BPV is defined as the change in market price for every change in market rate of interest by 1 bps. In
k
p
k
o
D
Price as on 31st Dec.2015 when it is compared with Market Rate of interest of 31st Dec.2014 i.e., 5.15%
p
e
p
& changed (increased by l bps) Market Rate of Interest i.e., 5.16%. It is calculated as.
k
D e a
p
2 In this case BPV will be equal to change in the market price as on 31st Dec 2015 at 7.25% & at 7.26%
(due to increase by l bps). It is calculated as
p
od
+7.25%)^5 + 108(1+7.25%)^6
H od a
H od a
k
D
o
Deepak Hooda
oo a D ee pak k H oo da De eep ak Ho ood da De ep ak Ho od
pa k H o da D ee pa k H oo da D ep ak H oo da De ep ak
e
p
ee a H oo da D e a H
pa k H o da D ee pa k H oo da D ep ak H oo da De eep ak
oo a D ee pak k H oo da De eep ak Ho ood da De ep ak Ho o
ee pa H oo da D e a H o a De ep ak H o a
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D ee
ee a H oo da D e a H
e e p a k H oo da D
da D ee pa H oo da De ep ak H od a De ep ak Ho od a
D eep ak H oo da De ep ak Ho od a D De epa ak Ho od a D ee
o
oo da D ee pak H oo da De ep ak Ho od a De ep ak Ho od
ep
o
oo da D ee pak H oo da De ep ak Ho od a De ep ak Ho od
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
p
k Ho od a D ee pa k H Hoo oda a D ee pak k H oo da De eep pak H
18
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
11. Market Risk
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D
ee pa k H oo da D e a H oo da
da D ee pa k H oo da De ep ak H ood a De ep ak Ho od a
e
e
e
D
D
D eep pak H oo da De ep ak Ho od a D De epa ak Ho
e ep k Ho od a
= 7.4585 + 6.9537 + 6.4830 + 6.0442+ 5.6351 +70.9246 = 103.4991
d
ep k H od a
ep k H od a
BPV = ii-i = 103.4991 -103.5473 =-0.482,
ee pa H oo da D e a H o a De ep ak H o a
ee pa H oo da D e a H o a De ep ak H o a
o
3 In this case BPV will be equal to change tµ the market price as on 31 Dec.2015
at 5. 15% & at 5 .14 % (due to decrease by 1 bps). It .is calculated as.
o
o
i. MP as on 31st Dec 15 at 5.15% = 6/ (1 +5 .15%) + 6/ (1 +5 .15%)^2 + 106/ (1+5.l5%)^2
k
= 5.7061 + 5.4267 + 91.1755 = 102.3083
p
= 5.7067 + 5.4277 + 91.2015 = 102.3359
BPV =ii -i =102.3359 - 102.3083 = + 0.0276
e
4 In this case' BPV will be equal to change in the market price as on 31st Dec.2015 at 7.25% & at 7.24%
(due to decrease by 1 bps). It is calculated as.
D
e
e
i. MPason315tDec.15at7.25%=8/ (1+7.25%) +8/ (1+7.25%)"2 + 8/ (1 +7.25%)^3 +8/ (1+7.25%)^4
H od a
+ 8/ (1+7.25%)^5 +108/ (1 +7.25%)^5
d
= 7.4592 + 6.9549 + 6.4848 + 6.0464 + 5.6377 + 70.9643 =103.5473
D ee a H oo da D ep ak H o a
ee a H oo da D e a H o a
ee a H oo da D e a H o a
ii. MP as on 31st Dec.15 at 7.24% = 8/ (1 +7.24%) + 8/ (1 +7.24%)^2 + 8/(1 +7.24%)^3 +8/(l +7.24%)^4
o
p
p
+ 8/(1+7.24%)^5+108/(1 +7.24%)^5
d
D
BPV = ii -i = 103.5958- 103.5473 = + 0.0485
a De ep ak Ho od a D ee pa k
o
o
k
############################################################################
d
d
Lakshay Bank Ltd. invests in the following 3 Securities of Face Value of ₹ 1000 each as under.
k
p
k
Yield 5% 7% 9%
p
e
p
k
d
e
D e a
a) 5.9 %
p
b) 6.4 %
o
c) 6.9%
D e
d) 7.4 %
e
a) 51000
b) 52000
c) 53000
p
d) 54000
od
od
H od a
H od a
a) 4770
k
D
o
b) 9000
o
c) 6885
od a d
Deepak Hooda
D eep pak H oo da De ep ak Ho od a D De epa ak Ho
D eep ak H oo da De ep ak Ho od a D e epa k Ho od
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D ee
ee a H oo da D e a H o a
k e p k o d e ep k H od a
o D e ep
e
d) 5490
ee pa H oo da D e a H o a De ep ak H o a
d) 988.75
c) 990.95
b) 975.95
a) 985.75
d) 968.95
c) 991.39
b) 958.97
a) 972.54
d) 1031.95
c) 1014.55
b) 1028.80
a) 1019.85
c) +0.3949
a) +0.4019
a) + 2.51%
d) (0.3949)
b) (0.4019)
d) (0.3949)
b) (0.4019)
b) (2.51% )
c) + 0.3949
a) + 0.4009
d) 5.21 Yrs.
c) 5.14 Yrs.
a) 4.98 Yrs.
d) 5.51 Yrs.
b) 5.41 Yrs.
a) 5.00 Yrs.
d) (2.655%)
b) 5.02 Yrs.
c) 5.31 Yrs.
c) + 2.655%
pa k H o da D ee pa k H oo da D ep ak H oo da De ep ak
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
k o od
D ee p a k o d D ee a H oo da D e a H
k
Deepak Hooda
ee a H oo da D e a H o a e ep k H od a
k e p k o d o D e
11. Market Risk
ee pa H oo da D e a H o a De ep ak H o a p
5. If the yield of Security-III after l year is 8.37% what would be its price
4. If the yield of Security-I after 1 year is 5.83% what would be its price.
pa k H o da D ee pa k H oo da D ep ak H oo da De eep ak
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
k o od e
D e a p k o d D ee a H oo da D e a H
k
10. If the yield of Security-I after 1 year is 5.83% what would be its Modified Duration.
k Ho od a D ee pa k H Hoo oda a D ee pak k H oo da De eep pak H
9. If the yield of Security-I after 1 year is 5.83% what would be its Macaulay Duration.
H od a p o
oo a D ee pak k H oo da De eep ak Ho ood da De ep ak Ho od
11. What would be % Change in Price of Security-I after 1 year if the rate decreases by 50 bps.
6. If the yield of Security-III after 2 years increases by 100 basis points over the yield of year 1,
8. If the yield of Security-Hl after 2 years decreases by 1 bps over the yield of year 1, What would
da D ee pa H oo da De ep ak H od a De ep ak Ho od a
da D ee pa k H oo da De ep ak H ood a De ep ak Ho od a
19
e
p
ee a H oo da D e a H
pa k H o da D ee pa k H oo da D ep ak H oo da De eep ak
oo a D ee pak k H oo da De eep ak Ho ood da De ep ak Ho o
ee pa H oo da D e a H o a De ep ak H o a
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D ee
ee a H oo da D e a H
e e p a k H oo da D
da D ee pa H oo da De ep ak H od a De ep ak Ho od a
D eep ak H oo da De ep ak Ho od a D De epa ak Ho od a D ee
o
oo da D ee pak H oo da De ep ak Ho od a De ep ak Ho od
ep
o
oo da D ee pak H oo da De ep ak Ho od a De ep ak Ho od
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
p
k Ho od a D ee pa k H Hoo oda a D ee pak k H oo da De eep pak H
20
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
11. Market Risk
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D
ee pa k H oo da D e a H oo da
da D ee pa k H oo da De ep ak H ood a De ep ak Ho od a
e
e
e
D
D
D eep pak H oo da De ep ak Ho od a D De epa ak Ho
e ep k Ho od a
++++++++++++++++++++++++++++++++++++
d
ep k H od a
ep k H od a
Please study the following table
ee pa H oo da D e a H o a De ep ak H o a
ee pa H oo da D e a H o a De ep ak H o a
o
Security- I Security- II Security- III
Amount 50000 30000 20000
Yield 5% 2500 7% 2100 9% 1800
o
o
Risk Weight 30% 15000 60% 18000 100% 20000
k
Tenure 7 Yrs. 7 Yrs. 7 Yrs.
p
2. Risk Weighted Assets= 15000 + 18000 + 20000 = 53000
e
3. Capital Required= 9% of RWAs = 9% of 53000 = 4770
D
4. In this case, Principal Amount= ₹ 1000/ Annual Yield = 5% of 1000 i.e., = ₹ 50
e
e
H od a
n = 6 years, remaining number of years.
d
D ee a H oo da D ep ak H o a
Market Price= 50/ (1 +5.83%) + 50/ (1 +5.83%)^2 + 50/ (1 +5.83%)^3 + 50/ (1 +5.83%)^4
ee a H oo da D e a H o a
ee a H oo da D e a H o a
+ 50/ (1 +5.83%)^5 + 50/ (l +5.83%)^5 +1050/ (l +5.83%)^6
o
p
= 50/ (1.0583) + 50/ (1.0583) ^2 +50/ (1.0583) ^3 + 50/ (1.0583) ^4 + 50/ (1.0583) ^5 + 50/ (1.0583)
p
d
^5+1050/(1.0583)
o
d
= 47.25 + 44.64 + 42. 18 + 39.86 + 37.67 + 747.37 + 958.97
D
D
a De ep ak Ho od a D ee pa k
p
k
Market Price= 90/ (1 +8.37%) + 90/ (1 +8.37%)^2 + 90/(1 +8.37%)^3 + 90/(1 +8.37%)^4 +
o
90/(1+8.37%)^5+1090/(1 +8.37%)^6
D
=90/ (1.0837) + 90/ (1.0837) ^2 + 90/ (1.0837) ^3 + 90/ (l.0837) ^ 4 + 90/ (1.0837) ^5 +1090/(1.0837) ^5
p
e
p
D e a
R=8.37% i.e., the current market rate of interest (Since the yield has increased by 100 bps over the yield
p
Market Price= 90/ (1 +9.37%) + 90/ (1 +9.37%)^2 + 90/ (l +9.37%)^3 + 90/ (1+9.37%)^4 +1090/ (1
e
+9.37%)^5
= 90/ (1.0937) + 90/ (1.0937) ^2 + 90/ (1.0937) ^3 + 90/ (1.0937) ^ 4 + 1090/ (1.0937) ^4
k
7. In this case BPV would be the change in Market Price after 2 years (remaining period 5 years) when
p
compared with the yield of 8.37% (yield of year 1) & when the yield increases by lbps i.e., it becomes
od
od
8.38% It is calculated as
H od a
H od a
k
Deepak Hooda
oo a D ee pak k H oo da De eep ak Ho ood da De ep ak Ho od
pa k H o da D ee pa k H oo da D ep ak H oo da De ep ak
e
p
ee a H oo da D e a H
pa k H o da D ee pa k H oo da D ep ak H oo da De eep ak
oo a D ee pak k H oo da De eep ak Ho ood da De ep ak Ho o
ee pa H oo da D e a H o a De ep ak H o a
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D ee
ee a H oo da D e a H
e e p a k H oo da D
da D ee pa H oo da De ep ak H od a De ep ak Ho od a
D eep ak H oo da De ep ak Ho od a D De epa ak Ho od a D ee
o
oo da D ee pak H oo da De ep ak Ho od a De ep ak Ho od
ep
o
oo da D ee pak H oo da De ep ak Ho od a De ep ak Ho od
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
p
k Ho od a D ee pa k H Hoo oda a D ee pak k H oo da De eep pak H
21
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
11. Market Risk
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D
ee pa k H oo da D e a H oo da
da D ee pa k H oo da De ep ak H ood a De ep ak Ho od a
e
e
e
D
D
D eep pak H oo da De ep ak Ho od a D De epa ak Ho
e ep k Ho od a
d
ep k H od a
b. MP for 5 yrs. at 8.38% = 90/ (1.0838) + 90/ (1.0838) ^2 + 90/ (1.0838) ^3 + 90/ (1.0838) ^ 4 + 1090/
ep k H od a
(1.0838) ^5
ee pa H oo da D e a H o a De ep ak H o a
ee pa H oo da D e a H o a De ep ak H o a
= 83.0411 + 76.6204 + 70.6960 + 65.2298 + 728.9215 = 1024.5088
o
BPV = b - a= 1024.5088 - 1024.9107 = - 0.4019
8. In this case BPV would be the change in Market Price after 2 years (remaining period 5 years) when
o
o
compared with the yield of 8.37% (yield of 1 year) and when the yield decreases by 1 bps i.e., it becomes
k
8.36%. it is calculated as
a. MP for 5 yrs. at 8.37% = 90/ (1.0837) + 90/ (1.0837) ^2 + 90/ (1.0837) ^3 + 90/ (1.0837) ^ 4
p
+ 1090/ (1.0837) ^5
= 83.0488 + 76.6345 + 70.7156 + 65.2539 + 65.2539 + 729.2579 = 1024.9107
e
b. MP for 5 yrs. at 8.36% = 90/ (1.0836) + 90/ (1.0836) ^2 + 90/ (1.0836) ^3 + 90/ (1.0836) ^4
+ 1090/ (1.0836) ^5
D
= 83.0565 + 76.6486 + 70.7352 + 65.2539 + 729.5944 = 1025.3126
e
e
H od a
BPV = b - a= 1025.3126 – 1024.91.7 = + 0.4019
d
D ee a H oo da D ep ak H o a
9. Investors are subject to 2 type of risk
ee a H oo da D e a H o a
ee a H oo da D e a H o a
i) Interest rate risk i.e., The risk of 'reinvestment rate of the annual interest to be received
o
p
p
ii) Risk of Capital Gain/ Loss on sale of the security at the end of the holding period. For any
d
investment there is a remaining period of holding when the loss on account of one risk is exactly balanced
o
d
D
by the gain on another risk. This remaining period of holding is called Duration. It is calculated as:
D
a. Calculate future cash flows to be received by holding the security
a De ep ak Ho od a D ee pa k
o
b. Reduce these cash flows to 'present value' at the discount rate & take their total
o
k
c. Multiply each of the 'present values' with the respective number of years left & take their total
d
d. Duration= Divide the total as at step 'c' with total as at step 'b', This is also called as 'McCulay Duration’
d
k
In the instant case, Cash Flows to be received are for 6 years, ₹ 50 for 5 years
p
k
o
& 1050 for the 6th year. Discount rate is 5.83%. Duration is calculated as
o
D
p
e
D ep ak H o a
a
D e a
p
############################################################################
p
od
H od a
k
Bond - I Bond - II
k
D
Annual Coupon 8% 9%
od a d
Deepak Hooda
D eep pak H oo da De ep ak Ho od a D De epa ak Ho
D eep ak H oo da De ep ak Ho od a D e epa k Ho od
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D ee
ee a H oo da D e a H o a
k e p k o d e ep k H od a
o D e ep
e
b) 17%
a) 10%
c) 17%
c) 17 %
ee pa H oo da D e a H o a De ep ak H o a
c) 8.8 %
b) 2.36%
d) 3.05%
Market price
d) 12.5 %
b) 2.36 %
d) 3.05 %
d) 18.64%
b) 15.11%
a) 13.41%
a) (2.36%)
c) (3.05%)
d) 18.64 %
a) 13.41 %
b) 11.11 %
a) Bond - I
c) (3.05 %)
a) (2.36 %)
b) Bond - II
d) 3.46 Yrs.
b) 2.76 Yrs.
a) 2.36 Yrs.
d) 3.46 Yrs.
c) 3.05 Yrs.
a) 2.36 Yrs.
c) 3.05 Yrs.
b) 2.76 Yrs.
pa k H o da D ee pa k H oo da D ep ak H oo da De ep ak
Term to Maturity
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
a) It will Increase
k o od
D ee p a k o d D ee a H oo da D e a H
k
k Ho od a D ee pa k H Hoo oda a D ee pak k H oo da De eep pak H
H od a p o
80
oo da D ee pak H oo da De ep ak Ho od a De ep ak Ho od
d D ee pa H oo da D e a H o a De ep ak H o a
1. How much is the Current Yield of Bond - II.
od a e p k o d D ee pa k H oo da D e a H oo da
Deepak Hooda
ee a H oo da D e a H o a e ep k H od a
k e p k o d o D e
90
11. Market Risk
ee pa H oo da D e a H o a De ep ak H o a p
4 years
pa k H o da D ee pa k H oo da D ep ak H oo da De eep ak
9. If yield on similar instruments comes down to 7%, how the Market Price of Bond – I will behave
da D ee pa H oo da De ep ak H od a De ep ak Ho od a
da D ee pa k H oo da De ep ak H ood a De ep ak Ho od a
22
e
p
ee a H oo da D e a H
pa k H o da D ee pa k H oo da D ep ak H oo da De eep ak
oo a D ee pak k H oo da De eep ak Ho ood da De ep ak Ho o
ee pa H oo da D e a H o a De ep ak H o a
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D ee
ee a H oo da D e a H
e e p a k H oo da D
da D ee pa H oo da De ep ak H od a De ep ak Ho od a
D eep ak H oo da De ep ak Ho od a D De epa ak Ho od a D ee
o
oo da D ee pak H oo da De ep ak Ho od a De ep ak Ho od
ep
o
oo da D ee pak H oo da De ep ak Ho od a De ep ak Ho od
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
p
k Ho od a D ee pa k H Hoo oda a D ee pak k H oo da De eep pak H
23
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
11. Market Risk
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D
ee pa k H oo da D e a H oo da
da D ee pa k H oo da De ep ak H ood a De ep ak Ho od a
e
e
e
D
D
D eep pak H oo da De ep ak Ho od a D De epa ak Ho
e ep k Ho od a
b) It will Decrease
d
ep k H od a
c) No Change
ep k H od a
ee pa H oo da D e a H o a De ep ak H o a
ee pa H oo da D e a H o a De ep ak H o a
++++++++++++++++++++++++++++++++++++
o
1. Current Yield = Coupon amount / Market price
=10/90=11.11%
o
o
k
2 We can calculate YTM by applying by linear Interpolation
i. Suppose YTM is 16%, value of 'r' will be 16%.
MP= 8/ (1+16%) + 8/ (1+16%)^2 + 108/ (1+16%)^3
p
=6.90+5.94+69.19=₹ 82.03
e
MP = 8/ (1 + 18 %) + 8/ (l + 18%)^2 + 108/ (1+18%)^3
= 6.78 + 5.74 + 65.73 = 78.23
D
e
e
H od a
= 16 + 2 x (2.03 /3.78) = 16 + 2 x 0.53703 = 16 + 1.07 = 17.07% i.e., 17%
d
D ee a H oo da D ep ak H o a
Method - II Apply the formula
ee a H oo da D e a H o a
ee a H oo da D e a H o a
o
p
p
YTM = Coupon Amount + (Redemption Amount-MP) / Term to Maturity % .
d
o
d
---------------------------------------------------------------------
D
D
(Redemption Amount + MP) /2
a De ep ak Ho od a D ee pa k
o
d
3 Method I We can calculate YTM by applying Linear Interpolation
i. Suppose YTM is 16%, value of 'r' will be 16%.
k
p
k
e
p
D e a
p
---------------------------------------------------------------
e
od
H od a
4 Cash Flows to be received are for 3 years, ₹ 8 for 2 year & ₹ 108/ for the 3rd year. Discount rate
H od a
k
k
D
o
Deepak Hooda
oo a D ee pak k H oo da De eep ak Ho ood da De ep ak Ho od
pa k H o da D ee pa k H oo da D ep ak H oo da De ep ak
e
p
ee a H oo da D e a H
pa k H o da D ee pa k H oo da D ep ak H oo da De eep ak
oo a D ee pak k H oo da De eep ak Ho ood da De ep ak Ho o
ee pa H oo da D e a H o a De ep ak H o a
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D ee
ee a H oo da D e a H
e e p a k H oo da D
da D ee pa H oo da De ep ak H od a De ep ak Ho od a
D eep ak H oo da De ep ak Ho od a D De epa ak Ho od a D ee
o
oo da D ee pak H oo da De ep ak Ho od a De ep ak Ho od
ep
o
oo da D ee pak H oo da De ep ak Ho od a De ep ak Ho od
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
p
k Ho od a D ee pa k H Hoo oda a D ee pak k H oo da De eep pak H
24
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
11. Market Risk
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D
ee pa k H oo da D e a H oo da
da D ee pa k H oo da De ep ak H ood a De ep ak Ho od a
e
e
e
D
D
D eep pak H oo da De ep ak Ho od a D De epa ak Ho
e ep k Ho od a
= 6.84 + 5.84 + 67.43 = ₹ 80.11
d
ep k H od a
ep k H od a
b. Multiply with remaining respective number of years.
ee pa H oo da D e a H o a De ep ak H o a
ee pa H oo da D e a H o a De ep ak H o a
= 6.84 x 1 + 5.84 x 2 + 67.43 x 3
o
= 6.84 + 11.68 + 202.29 = 220.81
o
k
5 Cash Flows to be received are for 4 years, 10 for 3 year & ₹ 110 for the 4th year. Discount rate is
13 .41 %. Present Values are calculated and are as under.
a. PVs = 10/ (1 + 13.41 %) + 10/ (1 + 13.41) ^2 + 10/ (1+13.41 %) ^3 + 110/ (1+13.41%)^4
p
= 8.82 + 7.77 + 6.86 + 66.49 = ₹ 89.94
e
= 8.82 x 1 + 7.77 x 2 + 6.86 x 3 + 66.49 x 4
= 8.82 + 15.54 + 20.58 + 265.96 = 310.90
D
e
e
c. McCulay Duration= 310/89.94 = 3.4567 Yrs.= 3.46 Years
H od a d
d. Modified Duration = McCulay Duration / (1 + Yield)
D ee a H oo da D ep ak H o a
=3.46 / (1+13.41 %) = 3.46 / 1.1341 = 3.05 Yrs.
ee a H oo da D e a H o a
ee a H oo da D e a H o a
o
p
p
6 Expected % Change in Price = - Modified Duration x % Change in Yield
d
= - 3.05 x - 1 = 3.05 %
o
d
D
= - 3.05 x - 1 = 3.05 %
o
k
d
p
k
o
9 Market Rate of Interest & the Market Price of the bond are inversely related.
o
If rates of interest come down, the price increases. If Rate of interest comes down to 7 % and the Coupon
D
p
Rate or the Rate of interest on Bond-I is 8%, the price of the bond will naturally increase.
e
p
k
############################################################################
k
d
e
Bank holds 3 years bonds with face value of ₹ 1000 and coupon rate of 6% payable yearly. The
e
D ep ak H o a
a
current yield is 10% on this bond. Calculate Macaulay's duration, Modified Duration, Price change
D e a
p
p
o
D ee
e
p k
od
od
H od a
H od a
k
k
D
o
o
od a d
Deepak Hooda
D eep pak H oo da De ep ak Ho od a D De epa ak Ho
D eep ak H oo da De ep ak Ho od a D e epa k Ho od
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D ee
2010:
ee a H oo da D e a H o a
k e p k o d e ep k H od a
o D e
GOI bonds.
ee pa H oo da D e a H o a De ep ak H o a e ep
a) ₹ 95.20
b) 11 paise
pa k H o da D ee pa k H oo da D ep ak H oo da De ep ak
c) 12.5 paise
b) 13.1 paise
9% GOI Bond 18
7% GOI Bond 16
9% GOI Bond 18
7% GOI Bond 16
a) 14.5 paise
Due to change in
rounded off to 27 p.
d) 11.90 paise
a) 10.02 paise
d) 12.34 paise
c) 11.29 parse
during this period?
during this period?
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
k o od
D ee p a k o d D ee a H oo da D e a H
k
At par
At par
At Par
At Par
Macaulay's duration = 2.82 year
FV
k Ho od a D ee pa k H Hoo oda a D ee pak k H oo da De eep pak H
p o
7.65%
7.32%
7.34%
7.12%
od a o d D ee pa k H oo da D e a H oo da
o d D e e p a k H oo da D
Yield
a De ep ak Ho od a D ee pa k
D ep ak H o a e p k H od a
o e p k o d D e
If current yield changes to 9.90%, the new price of bond shall be
D eep ak H oo da De ep ak Ho od a D De epa ak Ho od a D ee
e p = Modified duration x change in yield = 2.6643 x 10 BPS = 26.64 p
Deepak Hooda
ee a H oo da D e a H o a e ep k H od a
k e p k o d o D e
(Refer the abovementioned Example to arrive at Macaulay’s Duration)
11. Market Risk
120.50
105.80
124.00
108.40
Champak Bank an investment in bonds as under, on Sept 30, 2009:
ee pa H oo da D e a H o a De ep ak H o a
pa k H o da D ee pa k H oo da D ep ak H oo da De eep ak
Price
Modified duration = Macaulay's duration / 1+ yield = 2.82 / 1.06 = 2.6643 years
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
k o od e
D e a p k o d D ee a H oo da D e a H
k
k Ho od a D ee pa k H Hoo oda a D ee pak k H oo da De eep pak H
p o
120500
105800
124000
108400
H od a
############################################################################
yield of these securities, the yield and price changed as under as on Mar 31,
03 If there is increase in yield by 100 basis points during this period, what will be the price of 7%
01 What is the change in basis point value for each basis point increase in yield for 7% GoI bonds
02 What is the change in basis point value for each basis point increase in yield for 9% GOI bonds
da D ee pa H oo da De ep ak H od a De ep ak Ho od a
da D ee pa k H oo da De ep ak H ood a De ep ak Ho od a
25
e
p
ee a H oo da D e a H
pa k H o da D ee pa k H oo da D ep ak H oo da De eep ak
oo a D ee pak k H oo da De eep ak Ho ood da De ep ak Ho o
ee pa H oo da D e a H o a De ep ak H o a
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D ee
ee a H oo da D e a H
e e p a k H oo da D
da D ee pa H oo da De ep ak H od a De ep ak Ho od a
D eep ak H oo da De ep ak Ho od a D De epa ak Ho od a D ee
o
oo da D ee pak H oo da De ep ak Ho od a De ep ak Ho od
ep
o
oo da D ee pak H oo da De ep ak Ho od a De ep ak Ho od
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
p
k Ho od a D ee pa k H Hoo oda a D ee pak k H oo da De eep pak H
26
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
11. Market Risk
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D
ee pa k H oo da D e a H oo da
da D ee pa k H oo da De ep ak H ood a De ep ak Ho od a
e
e
e
D
D
D eep pak H oo da De ep ak Ho od a D De epa ak Ho
e ep k Ho od a
b) ₹ 93.90
d
ep k H od a
c) ₹ 92.10
ep k H od a
d) no change will take place
ee pa H oo da D e a H o a De ep ak H o a
ee pa H oo da D e a H o a De ep ak H o a
o
04 If there is increase in yield by 100 basis points during this period, what will be the price of 9%
GOI bonds.
a) ₹ 112.71
o
o
b) ₹ 111.96
k
c) ₹ 111.12
d) ₹ 110.87
p
05 The bank decides to sell the 7% Gel bonds on Mar 31, 2010 itself, to stop the loss. How much it
will lose on this sale transaction ?
a) ₹ 1210
e
b) ₹ 1670
c) ₹ 2400
d) ₹ 2600
D
e
e
H od a
06 The bank decides to sell the 9% Go! bonds on Mar 31, 2010 itself, to stop the loss. How much it
d
will lose on this sale transaction
D ee a H oo da D ep ak H o a
a) ₹ 3500
ee a H oo da D e a H o a
ee a H oo da D e a H o a
b) ₹ 3100
o
p
c) ₹ 2800
p
d
d) ₹ 2600
o
d
D
D
++++++++++++++++++++++++++++++++++++
a De ep ak Ho od a D ee pa k
o
d
2 (124 - 120.50) / 7.65-7.34) = ₹ 3.50 / 31 = 11.29 paise
k
p
k
3. Change for one basis points = (108.40 - 105.80) / (7.32 - 7.12) , ₹ 2.90 / 20 = 14.5 paise. Change for
o
e
p
4. Change for one basis points = (124 - 120.50) I 7.65-7.34) = ₹ 3.50 / 31 = 11.29 paise. Change for 100
k
D e a
p
############################################################################
k
od
H od a
Due to change in yield of these securities, the yield and price changed as under as on Mar 31,
k
2010:
D
o
Deepak Hooda
D eep pak H oo da De ep ak Ho od a D De epa ak Ho
D eep ak H oo da De ep ak Ho od a D e epa k Ho od
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D
18
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D ee
ee a H oo da D e a H o a
k e p k o d e ep k H od a
o D e
GOI bonds.
ee pa H oo da D e a H o a De ep ak H o a e ep
% GOI bonds.
d) ₹ 5600
c) ₹ 5400
b) ₹ 4670
a) ₹ 4210
d) ₹ 3750
c) ₹ 3800
b) ₹ 4000
a) ₹ 4200
b) 13 paise
a) 12 paise
c) 10 paise
a) 12 paise
11% GOI Bond
d) ₹ 124.50
c) ₹ 119.10
b) ₹ 109.90
a) ₹ 105.20
c) ₹ 114.80
b) ₹ 116.90
a) ₹ 118.60
c) 14 paise
b) 11 paise
pa k H o da D ee pa k H oo da D ep ak H oo da De ep ak
d) no change
d) no change
d) no change
k o od
D ee p a k o d D ee a H oo da D e a H
k
At Par
++++++++++++++++++++++++++++++++++++
ee pa H oo da D e a H o a De ep ak H o a
e p k
8.60%
o d
Deepak Hooda
ee a H oo da D e a H o a e ep k H od a
k e p k o d o D e
11. Market Risk
p
113.30
ee pa H oo da D e a H o a De ep ak H o a
pa k H o da D ee pa k H oo da D ep ak H oo da De eep ak
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
k
itself, to make the profit. How much profit it will be able to make on this sale?
itself, to make the profit. How much profit it will be able to make on this sale?
k o od e
D e a p o d D ee a H oo da D e a H
k
3. Change for one basis points = (109.80 - 107.60) / (8.40 - 8.20) = ₹ 2.20 I 20 = 11 paise.
k Ho od a D ee pa k H Hoo oda a D ee pak k H oo da De eep pak H
p o
226600
H od a
oo a D ee pak k H oo da De eep ak Ho ood da De ep ak Ho od
What is the change in basis point value for each basis point increase in yield for 9% GOI bonds
06 Due to expected adverse change, the bank decides to sell the 11% GOI bonds on Mar 31, 2010
What is the change in basis point value for each basis point increase in yield for 11 % GOI bonds
03 If there is decrease in yield by 100 basis points during this period, what will be the price of 9%
da D ee pa H oo da De ep ak H od a De ep ak Ho od a
da D ee pa k H oo da De ep ak H ood a De ep ak Ho od a
27
e
p
ee a H oo da D e a H
pa k H o da D ee pa k H oo da D ep ak H oo da De eep ak
oo a D ee pak k H oo da De eep ak Ho ood da De ep ak Ho o
ee pa H oo da D e a H o a De ep ak H o a
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D ee
ee a H oo da D e a H
e e p a k H oo da D
da D ee pa H oo da De ep ak H od a De ep ak Ho od a
D eep ak H oo da De ep ak Ho od a D De epa ak Ho od a D ee
o
oo da D ee pak H oo da De ep ak Ho od a De ep ak Ho od
ep
o
oo da D ee pak H oo da De ep ak Ho od a De ep ak Ho od
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
p
k Ho od a D ee pa k H Hoo oda a D ee pak k H oo da De eep pak H
28
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
11. Market Risk
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D
ee pa k H oo da D e a H oo da
da D ee pa k H oo da De ep ak H ood a De ep ak Ho od a
e
e
e
D
D
D eep pak H oo da De ep ak Ho od a D De epa ak Ho
e ep k Ho od a
Hence value after change= 107.60 + 11.00 = ₹ 118.60
d
ep k H od a
ep k H od a
4. Change for one basis points = (113.30 - 110.50) / (8.80 - 8.60) = ₹ 2.80 / 20 = 14 paise.
ee pa H oo da D e a H o a De ep ak H o a
ee pa H oo da D e a H o a De ep ak H o a
Change for 100 basis points= 14 x 100 = ₹ 14.00.
o
Hence value after change= 110.50 + 14.00 = ₹ 124.50
o
·
k
6- 226600 - 221000 = 5600
############################################################################
p
VaR ₹ 5 Lac with 95% confidence level. If there are 250 trading days in a year.
1. How many days in a year there is a possibility of loss of ₹ 5 Lac or more. - 12.5
e
D
2. How many days in a year there is a possibility of loss of less than ₹ 5 Lac. - 237.5
3. How many days in a year there is not a possibility of loss of ₹ 5 Lac or more. - 237.5
4. How many days in a year there is a not a possibility of loss of less than ₹ 5 Lac. - 12.5
e
e
H od a
5. How many days in a year there is not a possibility of loss of not of ₹ 5 Lac or more - 237.5
d
6. How many days in a year there is a not a possibility of loss of not less than ₹ 5 Lac. -12
D ee a H oo da D ep ak H o a
ee a H oo da D e a H o a
++++++++++++++++++++++++++++++++++++
ee a H oo da D e a H o a
o
p
p
The above statement means
d
D
possibility of loss of ₹ 5- Lac or more is only-5%;
a De ep ak Ho od a D ee pa k
o
o
k
############################################################################
d
d
You have a $1,000 par value 6%-annual coupon bond matures in 2 years yielding 6.2%. Calculate
the bond’s modified duration and expected percentage change in bond price given a 0.5%
k
p
k
decrease in yield.
o
o
D
++++++++++++++++++++++++++++++++++++
p
e
p
We first need to calculate the Macaulay’s duration, which is the average maturity of the bond cash flows
k
weighted based on their relevant contribution to the present value of the bond.
k
d
e
e
D ep ak H o a
a
D e a
p
p
o
D ee
od
H od a
H od a
Modified duration works out to 1.83 which means the bond prices increases (decreases) by 1.83% given
k
k
D
The percentage bond price change given a 0.5% decrease in yield equals 0.915% (i.e. -1.83×(-0.5%)).
od a d
Deepak Hooda
D eep pak H oo da De ep ak Ho od a D De epa ak Ho
D eep ak H oo da De ep ak Ho od a D e epa k Ho od
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D ee
where
ee a H oo da D e a H o a
k e p k o d e ep k H od a
o D e ep
ee pa H oo da D e a H o a De ep ak H o a
pa k H o da D ee pa k H oo da D ep ak H oo da De ep ak e
++++++++++++++++++++++++++++++++++++
ee pa H oo da D e a H o a De ep ak H o a
++++++++++++++++++++++++++++++++++++
od a e p k o d D
Deepak Hooda
ee a H oo da D e a H o a e ep k H od a
k e p k o d o D e
11. Market Risk
ee pa H oo da D e a H o a De ep ak H o a p
pa k H o da D ee pa k H oo da D ep ak H oo da De eep ak
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
k o od e
D e a p k o d D ee a H oo da D e a H
k
k Ho od a D ee pa k H Hoo oda a D ee pak k H oo da De eep pak H
H od a p o
############################################################################
############################################################################
co-efficient of the two stock returns is 0.50. If MS. Mouship holds equal amount of each stock,
The portfolio modified duration is obtained by taking the weighted average of the modified duration of the
da D ee pa H oo da De ep ak H od a De ep ak Ho od a
da D ee pa k H oo da De ep ak H ood a De ep ak Ho od a
29
D eep ak H oo da De ep ak Ho od a D De epa ak Ho od a D ee
e p
Deepak Hooda
ee a H oo da D e a H o a e ep k H od a
k e p k o d o D e
11. Market Risk
ee pa H oo da D e a H o a De ep ak H o a p
pa k H o da D ee pa k H oo da D ep ak H oo da De eep ak
Portfolio modified duration is calculated as follows: (3,042,900/17,037,000)2.36 +
pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
k o od e p k o d D ee a H oo da D e a H
Total market value of the portfolio = 3,042,900 + 4,244,500 + 9,749,600 = 17,037,000
D e a k
k Ho od a D ee pa k H Hoo oda a D ee pak k H oo da De eep pak H
p o
An approximate relationship between the daily change in the value of the portfolio, P and the
Therefore, the portfolio dollar duration of a basis point (DV01) is obtained as follows: (5.0385 x
H od a
############################################################################
Consider a portfolio of options on a single asset. Suppose that the delta of the portfolio is 12, the value of
the asset is $10, and the daily volatility of the asset is 2%. Estimate the one-day 95% VaR for the portfolio
da D ee pa H oo da De ep ak H od a De ep ak Ho od a
da D ee pa k H oo da De ep ak H ood a De ep ak Ho od a
30